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Portfolio Choice
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The portfolio choice model is introduced, and the first‐order condition is derived. Properties of the demand for a single risky asset are derived from second‐order risk aversion and decreasing absolute risk aversion. Optimal investments are independent of initial wealth for investors with constant absolute risk aversion. Optimal investments are affine functions of initial wealth for investors iwth linear risk tolerance. The optimal portfolio for an investor with constant absolute risk aversion is derived when asset returns are normally distributed. Investors with quadratic utility have mean‐variance preferences, and investors have mean‐variance preferences when returns are elliptically distributed.
Title: Portfolio Choice
Description:
The portfolio choice model is introduced, and the first‐order condition is derived.
Properties of the demand for a single risky asset are derived from second‐order risk aversion and decreasing absolute risk aversion.
Optimal investments are independent of initial wealth for investors with constant absolute risk aversion.
Optimal investments are affine functions of initial wealth for investors iwth linear risk tolerance.
The optimal portfolio for an investor with constant absolute risk aversion is derived when asset returns are normally distributed.
Investors with quadratic utility have mean‐variance preferences, and investors have mean‐variance preferences when returns are elliptically distributed.
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